The Political Economy of Trade Policy

The underlying assumption employed in our analysis of the arguments for trade barriers in Chapter 10 was that the government, in setting the level of protection, was benevolent and that it acted to maximise the welfare of the nation via the representative consumer. Under such an assumption, among many trade barriers discussed, only a few can (as the first best or, more often, the second best policies) advance the national welfare compared with the free trade situation. These cases of nearly justified trade intervention may include the correction of a distortion (that is, closing a gap between marginal cost and marginal benefit), revenue collection or terms of trade correction. The latter is rightly seen as a ‘beggar-your-neighbour policy’, thus inviting retaliation from trading partners. In most cases, however, as our analysis clearly demonstrated, protectionist policies result in a net national welfare loss. Why then do, protectionist policies in practice exist? The most common explanation is that the national welfare loss due to protectionist policies is relatively small. Moreover the loss is dispersed across a large number of economic agents (consumers) preventing them effectively making a stand against such protectionist policies. A similar characterisation can be made of those producers who get hurt through the implementation of protectionist trade policies. On the other hand, we find some groups of economic agents (producers) rationally spending resources with the objective of influencing the suppliers of protection, government, in its decision regarding the level and the instruments of protection.